Trade-Based Money Laundering in International Finance: Legal Loopholes, Regulatory Challenges and the Role of Trade Finance
Kiransmitha ENov 1, 202610.5281/zenodo.23859566pp. 162–18221 pages
Trade-Based Money Laundering (TBML) disguises the proceeds of crime through legitimate cross-border trade by employing techniques such as over-invoicing, under-invoicing, multiple invoicing, phantom shipments, and misdescription of goods. Opaque corporate structures and divergent national regulatory frameworks further complicate its detection. Adopting a doctrinal approach, this article critically examines India's legal framework for combating TBML under the Prevention of Money Laundering Act, 2002, the Foreign Exchange Management Act, 1999, the Customs Act, 1962, and applicable banking regulations, with reference to relevant Financial Action Task Force (FATF) standards. It identifies key regulatory weaknesses, including fragmented institutional oversight, difficulties in tracing ultimate beneficial ownership, reliance on trade documentation, and limitations in cross-border enforcement. The article also examines the dual role of trade finance instruments, particularly letters of credit and documentary collections, which facilitate international commerce but may also be exploited to legitimise suspicious transactions. It argues that statutory provisions alone are insufficient to address TBML effectively. An integrated, risk-based regulatory approach is necessary, incorporating coordinated enforcement, improved inter-agency information sharing, technology-assisted trade monitoring, greater corporate transparency, and stronger international cooperation.